TAIPEI -- ARM Holdings, a British chip innovator controlled by SoftBank Group, will form a joint venture with Chinese partners "within months" to help companies in China develop semiconductor technologies, including products that could have security uses, a company executive told the Nikkei Asian Review on Monday.
"The intent is for that joint venture to develop products for the Chinese market for China partners, and specifically around the areas of technology that a Western company might not be able to do," said Rene Haas, president of ARM's intellectual property products group.
"For example, if somebody was building [a system on a chip] for China military or China surveillance, the security had to be at very high clearance in such a way that China wants to have it only inside China. With this kind of new joint venture, this company can develop that. In the past this is something we couldn't do," Haas said.
System on a chip, or SoC, refers to a chip that integrates various functions that can include computing and communications.
ARM's architecture is widely used by chipmakers everywhere for their SoC products, and the company has a 90% global market share of the mobile gadget chip market including smartphones, tablets and connected devices. Major global tech hardware and chip companies including Apple, Qualcomm and Samsung Electronics all license technologies from ARM.
But according to a story in the U.S. defense trade publication Military & Aerospace Electronics published in December 2016, bigger rival Intel's microprocessors dominate the embedded computing systems in the defense sector, while ARM remains a newcomer in that area.
Beijing's semiconductor push
Still, Haas pointed out that ARM sees Beijing's big push to build a domestic semiconductor industry to cut reliance on foreign products as a great opportunity. The British chip designer was bought by Japanese technology group SoftBank in mid-2016.
To become self-sufficient in key technologies, particularly following the U.S. National Security Agency's wiretapping scandal revealed by computer analyst Edward Snowden, Beijing has proposed to invest at least 1.2 trillion yuan ($177 billion) over a decade to build its own chip industry. Eventually, China wants to compete with Taiwan's world-class chipmakers and global semiconductor titans like Intel and Qualcomm.
"We think it's a good thing as China wants to be secure and controllable. They want to grow the market and ultimately they want to have control of their technology that only resides inside China. We thought it's the best way to grow there," Haas said, adding that ARM will provide intellectual property products, technical support and training, while Chinese investors will be responsible for management of the venture.
"This hypothetical security thing is the completely new area and it's the area that China wants to have domestic control and capability that Western companies would not be able to participate in it. If it's based on the technology that we bring, we could benefit from that," the executive said.
ARM's new business direction comes at a time when China is spending an exorbitant amount on bolstering its defense capabilities, a move that worries its neighbors and alarms some governments in the West.
The International Institute for Strategic Studies, a London-based think tank, says China's overall defense budget for 2016 was $145 billion, accounting for one-third of the total military spending in Asia and ranking second globally behind only the $604.5 billion spent by the U.S. The think tank further claimed that China seems to be achieving "near-parity with the West" on air power.
Commenting on possible concerns from governments in the West, Haas downplayed the sensitivity of the issue.
"Let's say China wants to have something that is very secure and specific to China," he said. "That will be something today that as a Western company we could not do. The joint venture can do it. And it could be based on the ARM technology but made specifically for China. That's what is different."
"I will give you a simple analogy of cars," the executive said. "In the U.S., the steering wheels are on the left, and in England it's on the right -- and let's say the Chinese said, 'I want the steering wheels in the middle.' We said that we will never do that. But Chinese policies said it's steering wheels in the middle. So we give them the tools to build the cars with steering wheels in the middle. That's kind of what it is."
Asked about how ARM can ensure sensitive technologies developed in China will not be leaked to North Korea or countries under a United Nations embargo, Haas said his company is still working it out. "That's a good question and we have to figure that one out. Those are the kind of the questions that have to be finalized. But one thing is clear -- that the products can be only sold in [China]," he said.
There have been several instances of Chinese companies being sanctioned by the U.S. authorities for exporting sensitive goods to countries embargoed by the U.N.
In March, Chinese telecommunications group ZTE pleaded guilty and and agreed to pay a fine of $1.19 billion to the U.S. authorities for exporting electronics to North Korea and Iran.
Haas said that ARM is partnering with Chinese private equity firm Hopu Investments on the joint venture, which was announced on May 14 in China and reported about in Chinese language media. He said the two companies had signed a letter of intent, and added the Shenzhen government is also involved as the new entity will be based in the southern Chinese city.
But it is not clear yet how much capital will be injected into the new entity and which other Chinese investors or companies may be engaged, according to Haas, although he did say ARM estimates the joint venture will be up and running "within months."
It will be the first time that ARM has created a separate company to transfer technology for doing business, Haas said.
Hopu is headed by Fang Fenglei, a Chinese financier and titular chairman and majority shareholder of Goldman Sachs' China operations, according to the Financial Times. The fund has $2.5 billion to $3 billion in assets under management, according to various reports in Chinese media.
In January, China's Ministry of Science and Technology said in a statement on its website that Hopu and ARM were launching a new investment fund with backing from Chinese sovereign wealth fund China Investment Corporation, the Beijing-owned Silk Road Fund, Singapore's sovereign wealth fund Temasek Holdings, and Shenzhen government-owned conglomerate Shum Yip Group.
ARM confirmed the ministry's announcement with a statement in February, without naming other investors beyond Hopu. ARM said the fund aims to invest in startups in China and beyond and to work on emerging technologies including the "internet of things," autonomous vehicles, cloud computing, big data and artificial intelligence. The fund has $800 million under its investment.
ARM continues to be confident about China's growth potential, said Haas, adding that the country will become the chip designer's top market in the world in five to 10 years.